Inside Financial Services

The Supreme Court Hands Down An Ominous Decision

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You would think that if there were one lesson we could confidently take away from the credit crunch, it would be, “Don’t lend money to subprime borrowers if you think they won’t be able to repay it.” So easy to remember! But no:

Well, it’s time to roll the dice again. According to the 5-4 majority opinion at the U.S. Supreme Court on Thursday, housing lawsuits based on race no longer need proof of intentional discrimination.

In other words, even defendants with no racist intent can be sued for racist outcomes if a plaintiff can prove “disparate impact.” That’s when a race-neutral policy results in negative outcomes for an identifiable minority. [Emph. added.]

It is exceedingly difficult for a lender to intentionally discriminate on the basis of race, by the way. There is no checkbox for race or ethnicity on the typical mortgage or car-loan application. Often, the application is done on-line or via a third party such as an auto dealer or mortgage broker, so a representative from the lender doesn’t even know what the prospective borrower looks like. Oh, and discrimination by race in lending is illegal, so that the incentive to not engage in it is inordinately high. As if to underscore all this, Ally Bank, which reached an $80 million settlement with the CFPB last year over supposedly discriminatory practices in auto lending, can’t find a single victim to pay settlement money to.

All of which is to say, in this country, intentional racial discrimination in lending basically doesn’t happen: study after study has shown that if you adjust application data for relevant inputs like credit scores and loan-to-income ratios, whites and minorities are turned down at similar rates. But since minorities tend to have lower FICOs and incomes, in terms of raw numbers they tend to be turned down more often. That’s what “disparate impact” is, and now borrowers can sue if they think they’re a “victim” of it.

Wonderful. Going forward, banks can thus be counted on to bend over backwards to seek out and approve unqualified borrows, just to avoid lawsuits. Didn’t we all just learn the hard way that this is a bad idea? The end result will end up being bad for the borrower, bad for the economy, and bad for the financial system. And if the shoddy lending goes on on a wide enough scale, it might even end up being cataclysmic.

I’d assumed that everything we all learned from the credit crunch was pretty much well-understood all around. It’s discouraging to see that the lessons are starting to be forgotten already.

What do you think? Let me know!

9 Responses to “The Supreme Court Hands Down An Ominous Decision”

  1. sgr

    You know, America… it was a good run. Three rulings last week (disparate impact, Obamacare, Gay Marriage) shows that we have finally crossed the Rubicon, and laws do not matter. 5 elderly people in black robes (and not especially bright ones) now write the law of the land. Words don’t mean what they mean anymore. But hey… nice run.

  2. etoleary

    What’s at work here is a government led allocation of credit. It will come to no good.

  3. sue

    it’s hard being sgr. (s)he didn’t get what (s)he wanted because of activist judges….of course an activist judge is any judge that rules against your cause. the old, stupid, supremes have been spot on every time Kennedy has ruled with the conservative block. quit your bitchin’, America is doing just fine.

  4. Dennis Roman

    For murder – you need premeditation

    For manslaughter – in the absence of premeditation you actually need a dead body

    For disparate impact there is nether premeditation nor a dead body but somehow the bank is guilty anyway! No crime was commited nor did they even think about committing a crime. But get out the checkbook and deal with your unfortunate damage to your Brand to boot!

  5. Drj

    Lawyers like lawyers. It’s just another lawyer full-employment act as they can now go out and find anyone rejected and take up their cause for big bucks.

  6. Pat O'Brien

    The notion that banks won’t make a loan due to race is absurd. Bankers are greedy, show them a good loan and they’ll fall over each other to make it. If you don’t believe that, start your own bank and get rich doing what the other banks won’t.

  7. Banker

    We have swung so far in the wrong direction on racism and discrimination. There are so many laws, handouts, and guilt trips over the race card that I would argue that this might start to fuel a fire rather than put it out once and for all. Not to mention the economic consequences of course.

  8. mike lesse

    we are ona
    our way to Puerto rico and Greece.

    • Aron

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